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The "Accounting Supervision Report on Annual Financial Reports of Listed Companies in 2023" (hereinafter referred to as the "Report") released by the China Securities Regulatory Commission on August 23 shows that listed companies and intermediary institutions such as accounting firms should continuously strengthen their ability to understand and apply corporate accounting standards and financial information disclosure rules, do a good job in related work on financial information disclosure of listed companies, continuously improve the quality of accounting information disclosure, and promote high-quality development of the capital market.

As of April 30, 2024, a total of 5,354 listed companies in the A-share market disclosed their 2023 annual financial reports, including 3,195 on the main board, 1,340 on the Growth Enterprise Market, 571 on the Science and Technology Innovation Board, and 248 on the Beijing Stock Exchange. 4,228 listed companies achieved profits and 1,126 suffered losses. Among the listed companies that disclosed their annual financial reports on schedule, 209 companies were issued audit reports with non-standard audit opinions, including 29 companies that could not express an opinion, 85 companies with qualified opinions, and 95 companies with unqualified opinions with explanatory notes.

The report points out that, in general, listed companies are able to implement corporate accounting standards and financial information disclosure rules well, but some listed companies still have accounting treatment or financial information disclosure errors in terms of revenue, long-term equity investment and corporate mergers, financial instruments, asset impairment, income tax, and non-recurring gains and losses.

Specifically, revenue-related issues include failure to properly identify performance obligations and measure revenue; incorrect understanding of the conditions for recognizing revenue using the applicable period method, such as failure to properly determine whether the customer can control the goods under construction during the company's performance, and failure to properly determine whether it has qualified collection rights; incorrect determination of the timing of transfer of control of the goods; recognition of revenue from project facility construction that is not in compliance with the economic substance of the relevant business; failure to properly determine the principal responsible persons and agents; and incorrect quality assurance accounting treatment.

Issues related to long-term equity investments and business combinations include incorrect classification of equity investments with put options; incorrect recognition of business combinations; inappropriate accounting treatment of performance compensation clauses in business combinations; failure to properly determine the scope of consolidation; and incorrect accounting treatment of disposals of subsidiaries.

Issues related to the recognition and measurement of financial instruments include incorrect classification of perpetual financing instruments; inappropriate classification of financial liabilities and equity instruments; incorrect subsequent measurement of overdue loans; inappropriate measurement of the fair value of investments in tradable shares; and inappropriate accounting treatment of derivative financial instruments.

Issues related to asset impairment include inappropriate measurement of expected credit losses on accounts receivable, including failure to properly consider the contractual right to deduct rent from lease deposits receivable, incorrect consideration of cash flows from credit enhancements that are not part of the contract terms, incorrect consideration of time value of money losses when measuring allowances for bad debts on accounts receivable, failure to properly classify credit risk characteristic combinations, failure to properly make allowances for bad debts on overdue long-term accounts receivable, incorrect measurement of allowances for inventory impairment, and incorrect identification or changes in asset groups.

In response to the above issues, the CSRC stated that it will continue to do a good job in three aspects in the next step. First, it will sort out the clues of problems found in listed companies during the review, follow up in a timely manner and conduct subsequent regulatory processing in accordance with regulations. Second, it will organize annual accounting supervision coordination meetings for typical problems found in the supervision work to unify the supervision caliber. Third, it will closely follow the hot and difficult accounting treatment issues in the market, continue to strengthen practical guidance in the form of case analysis, and improve the consistency and effectiveness of the capital market's implementation of corporate accounting standards and financial information disclosure rules.

The CSRC emphasized that listed companies and intermediary institutions such as accounting firms should attach great importance to the issues raised in the accounting supervision reports, promptly correct errors in financial reports, and do a good job in related work on the disclosure of financial information of listed companies.